Lessons from European Models for Universal Coverage

Risk adjustment is part of the reform package, but other countries have had problems with implementation

Richard Mark Kirkner

It may have been pure coincidence that as congressional debate on the massive health care reform legislation was winding down, the Swiss health economist Peter Zweifel, PhD, came to the United States to talk to academic groups about how his country regulates private health insurers to achieve universal coverage.

The chief editor of the International Journal of Health Care Finance and Economics and free market advocate brought a message about the unintended consequences of the Swiss parliament’s attempts to impose risk adjustment schemes on private health insurance.

Shifting regulatory landscape

Some health economists in the United States say these scenarios could foretell the shifting regulatory landscape for U.S. health plans.

Zweifel gave the keynote address at a Hofstra University conference on health insurance innovations from abroad. At a World Bank panel in New York he talked about the private alternative to public health insurance. A day later, he held a seminar at the University of Pennsylvania on regulation of Switzerland’s private but not-for-profit health insurance sector.

As the clock ticked toward the House of Representatives vote, many in Zweifel’s audiences were looking for insight into how universal coverage would work in the United States. Says Mark V. Pauly, PhD, professor of insurance and risk management at the Wharton School of the University of Pennsylvania: “The United States is envisioning doing the kind of risk adjustment they do in Switzerland and the Netherlands.”

Zweifel calls risk adjustment (RA) “the tip of the iceberg,” and the lessons he imparted were studies in bad examples as much as innovative approaches to universal coverage. The Swiss experience that he has studied so thoroughly, along with that of other European countries with large private health insurance markets, namely the Netherlands and Germany, may provide a preview of regulatory imperfections in the United States.

The Swiss health care system, like its Dutch counterpart, embodies some of the concepts already adopted in Massachusetts, according to the Commonwealth Fund. “These countries can serve as idea labs for health reform in the U.S., and we should seek to learn from their successes and failures, just as we learn from the experiences of states like Massachusetts,” Commonwealth Fund President Karen Davis said last year.

But if Switzerland is an idea lab, Zweifel will tell you it has been cranking out its share of clunkers. Switzerland, with a population of 7.8 million, began universal coverage in 1996 with narrow passage of a popular referendum.

With no public option, Swiss citizens must purchase private health insurance. Low-income purchasers receive government subsidies. Ninety private mutual insurers compete for business over 26 cantons, the Swiss equivalent of states.

The Swiss parliament has imposed RA schemes to neutralize insurer risk, discourage risk selection, and rein in government subsidy costs, with mixed results. Only two RA criteria exist: age and gender, the former broken into 15 categories. “Frankly there was not much of a concept behind capping risk adjustment,” Zweifel says. “It was just something that kept growing and it turned into a true redistribution scheme in a way that the creators had not envisaged.”


Evidence of that so-called redistribution scheme can be found in Zweifel’s own work showing that cross-subsidization — the amount that low-risk groups pay in premiums to cover costs for high-risk populations — has grown faster than overall health care expenditures (See graph below). Today, cross-subsidization equals about 1 percent of the Swiss gross domestic product. Despite the RA caps, health care costs in Switzerland have risen at approximately the same rate as the United States, according to Zweifel’s research.

How the young cross-subsidize the old in Switzerland

Another side effect of RA caps has been an absence of innovative new products. “Imagine you are an insurer, and you don’t even think about risk selection, but you have to come up with a new product,” Zweifel says. “Any marketing specialist will tell you it’s always the young that go for the new ideas. Next year what is going to happen? The government tells you that you have too many young people on your books, and age invariably is a risk adjuster. You have too many low risks in your risk population, so you pay into the scheme.” He blames this for the meager 10 percent penetration of managed care in Switzerland.

Zweifel has written that imperfect risk adjustment has an inherent conflict of interest. On one hand, refining an RA formula weakens health insurers’ incentives to risk select, especially when community rating is in play. On the other hand, unless RA is fully prospective, it undermines insurers’ quest for efficiency.

Meanwhile, the Swiss government is planning to add a third risk adjustor in 2012: visit to a hospital or nursing home of at least three days in the previous year. (In Switzerland, physicians do not share diagnostic data with insurance companies.) The Swiss insurer that devised this RA has shown it to be highly predictive of the following year’s health care expenditure, Zweifel says. “It’s exactly what you want; something that is predetermined, easy to administer, and of high explanatory power when it comes to health care expenditure later on.”

A model to imitate … or avoid?

To Zweifel, the most telling lesson Americans can learn from the Swiss system is to be wary of unintended consequences. His country’s less-than-stellar experiment with managed care is one such example. “Those who thought they could gain a competitive edge by running a managed care option did it, but many withdrew because they ran into problems with management or they didn’t know how to budget and offer incentives for quality,” he says.

Again, regulation resulted in an impossible situation for insurers despite managed care organizations getting an exemption from Switzerland’s any-willing-provider laws. “Ninety percent of conventional medical care is still subject to the any-willing-provider clause, which is bad enough for physicians, but it’s even worse for hospitals because many of the savings in managed care happens by signing up with particular hospitals and guaranteeing nice capacity and utilization in return for a lower fee,” he says.

How it could work in the United States

“This is not feasible in Switzerland because the public hospitals, which are the bulk of capacity, are owned and heavily subsidized by the cantons,” Zweifel adds. “So the cantons put their hospitals in the association, and sure enough the association of health insurers negotiates with the hospital association, and you cannot strike a preferential contract. It’s pure corporatism. The whole hospital component is out of managed care.”

Two European-like regulatory provisions that go into effect immediately with U.S. health care reform are federal review of health insurance premiums and requirements for minimum loss ratios.

But U.S. health economists expect that RA is one feature of the European landscape that will become more prominent in the United States. “Risk adjustment is essential, since it’s mentioned in 66 places in the Senate bill, for many, many facets of health care reform,” says Jonathan Weiner, DrPH, a member of the MANAGED CARE editorial advisory board who is a professor at the Johns Hopkins University Bloomberg School of Public Health.

The Netherlands has more experience using RA, and, like Switzerland, heavily subsidizes low-income purchasers. Germany levies premiums based on percentage of income, not risk. “They have accepted the notion that they will cross-subsidize,” says Richard A. Cooper, MD, professor at the University of Pennsylvania Leonard Davis Institute of Health Economics.

However, Cooper faults Switzerland for ignoring one critical risk adjuster: income. “You can’t risk adjust if you don’t know the income,” Cooper says. He cites research his group at Penn has conducted into health care costs in urban areas. “If you look at the lowest income zip code, an area such as North Philadelphia, for example, compared to an [affluent] area like the Main Line, the health care costs in the low-income area are double,” he says.

Pauly of the Wharton School expects the United States to enact RA systems to control premiums. The mandate to keep premiums comparable for low- and high-risk policy holders will pose a challenge for both government and private health plans. “We’re sailing into where the Swiss are,” he says. “The government has to do something to avoid the logical responses of insurance companies forced to charge the same premium to high and low risks, which is to cream-skim.”

Regulating RA “is not a slam dunk,” says Pauly. “Actually, it’s a source of endless controversy. If we go the way we’re going, health insurance is going to be like a regulated public utility, and that is how it is really in Switzerland and the Netherlands. A heavy component of that regulation is trying to deal with risk variation. So you first set up a system that has the unintended consequence of giving insurance companies a strong incentive to risk-select, and then you design a lot of backup systems to turn that off.”

Boston University’s Randall Ellis, PhD, president-elect of the American Society of Health Economists, welcomes Swiss-like regulation. But he’s been studying other European models, namely the United Kingdom and Scandinavian countries, to find clues for adding 35 million more lives to the insurance pool.

“Although risk adjustment is not a centerpiece for the plan-level compensation, it does play an important role in potentially partially capitating and rewarding primary care doctors for setting up a medical home,” Ellis says.

Two purposes

As the U.S. regulatory landscape shifts, Weiner at Johns Hopkins sees RAs serving two purposes: as an internal management tool for plans to evaluate risk and to regulate premiums within insurance exchanges. “That’s likely where most of the action is,” he says of the exchanges. “So if someone is selected against, they will get a payment from the exchange; if someone gets a positive selection, they will have to pay into the pool.” Of course, in Europe those selection differences are subsidized by the government to an extent, as they will be for lower-income U.S. families.

Zweifel himself thinks the European models offer little for the U.S. market. “It’s high time really to give back to insurers the right to negotiate” with providers, he says — a lesson the United States could teach Europe.

Richard Mark Kirkner is a health care journalist residing in Phoenixville, Pa.

Source: Patrick Eugster, Michèle Sennhauser, and Peter Zweifel. Capping Risk Adjustment? Working paper No. 0915, Socioeconomic Institute, University of Zurich, 2009

Switzerland requires everyone to buy private health insurance, offered by 90 companies.

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